Salvage Value
The estimated residual value of an asset at the end of its useful life, used as the basis for depreciation calculations.
What is Salvage Value?
Salvage value (also called residual value or scrap value) is the estimated amount a company expects to receive from disposing of an asset at the end of its useful life. It directly affects depreciation calculations: under the straight-line method, annual depreciation = (cost − salvage value) ÷ useful life. A higher salvage value reduces annual depreciation expense and increases reported earnings during the asset's life. Salvage value is an accounting estimate that management must determine at acquisition; if the estimate proves inaccurate, it is revised prospectively (not retroactively). For tax purposes, the IRS typically assumes a salvage value of zero for assets depreciated under MACRS, allowing companies to depreciate the full cost. Salvage value is also a key input in capital budgeting models that estimate end-of-project cash flows.
Example
A trucking company purchases a fleet vehicle for $80,000 and estimates a salvage value of $10,000 after 7 years. Under straight-line depreciation, annual expense = ($80,000 − $10,000) ÷ 7 = $10,000 per year. If the company instead estimated zero salvage value, annual depreciation would be $11,429 — reducing reported earnings by an additional $1,429 per year.